Beyond Trade-offs | May 28, 2019

Blue Haven Initiative: Wealthy families have the flexibility to drive impact across their portfolios

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Beyond Trade-offs is an ImpactAlpha podcast series, produced in partnership with Omidyar Network, in which impact investors look across the returns continuum at investment strategies to scale capital for impact.

ImpactAlpha, May 28 – When it’s your money, you get to do what you want with it, including pointing all of your assets toward impact.

The family business for many high- and ultra-high-net-worth families is the business of managing the wealth itself. The family offices for the highest-wealth families employ their own investment staff, advisors and external fund managers; others use “multi-family offices” that provide the same services. In the U.S. alone, the more than 3,000 single and multi-family offices hold more than $1.7 trillion in assets.

One perk of being such an asset owner: you get to set the rules. Liesel Pritzker Simmons and her husband Ian Simmons have for a decade committed to integrate impact across 100% of their assets. Blue Haven Initiative, their $500 million family office, accounts for impact across its portfolio, from public-equity funds to municipal bonds to venture capital to philanthropic grants.

“The role of the impact investor is to take a step back and say, “What’s the thing you’re trying to accomplish? What’s the best way to scale that impact?” Pritzker Simmons told ImpactAlpha’s David Bank for the seventh and final episode of our Beyond Trade-offs series, produced in collaboration with Omidyar Network. “Sometimes it’s through market rate investing. And sometimes, it absolutely is not.”

That flexibility is why high-net-worth families enjoy perhaps the greatest responsibly to drive the shift of capital towards impact. “People who are in the position of having significant wealth and who want to have impact – and many, many of them do – should avail themselves of all the tools in the toolkit,” Matt Bannick, former managing partner of Omidyar Network, said to kick off the podcast series.

“They should be thinking clearly about what issues they care about, where they want to play, and what kinds of capital they can deploy in service of having impact.”

Family values

Pritzker Simmons, an heiress to the Hyatt Hotels fortune and a former child actress, fought a legal battle starting in 2002 over her and her brother’s share of the family fortune. Simmons is himself an heir to the family that built locks on the Erie Canal and co-founded the Montgomery Ward department stores. The couple established Blue Haven Initiative in 2012 as a single-family office and are outspoken about investing with impact across the full range their family’s assets.

“We are inheritors. I did not make the money I am managing. And I know that,” Pritzker Simmons says. “But I take the responsibility of stewarding that money pretty seriously. I damn well better know what that money’s doing and make sure that it’s having as much of a positive impact on the world as possible as I pass it along to my children.”

Values alignment and that multigenerational perspective have made family offices a primary source of capital for many impact fund managers and, through direct investments, for many impact entrepreneurs as well. An estimated 250 family offices are targeting impact-related investments.

Omidyar Network itself is part family office, part venture capital fund and part philanthropic nonprofit. Founded by eBay founder Pierre Omidyar and his wife, Pam, Omidyar Network has committed nearly $1.5 billion in market-rate and catalytic impact investments as well as grants.

“Families have to be on the front lines of bearing the risk of early-stage innovation and fueling impact in the toughest market segments,” says Omidyar Network’s Robynn Steffen. (Listen to Omidyar Network’s Matt Bannick and Robynn Steffen in Episode One of the Beyond Trade-offs podcast series).

Families are free to pursue their own goals and set their own expectations for impact, risk and return. Diane Isenberg, whose father was the longtime CEO of Nabors Industries, a large land and offshore oil and gas driller, has staked out a provocative position for Ceniarth, her $400 million family office. “If you are rich today and invest in a manner that generates deep impact, and returns your capital with a yield in line with inflation and reasonable expenses, you will still be rich tomorrow,” Isenberg declared on ImpactAlpha last year.

Ceniarth is shifting $300 million over the next decade from its market-rate portfolio into a strategy it calls Impact-First Capital Preservation. The strategy allows the family office to invest in managers and direct investments that support enterprises serving the demonstrably poor and underserved without the expectation a market-rate return. Ceniarth believes that the risks of such investments can be lower than is generally perceived and that they can provide steady, if unspectacular, returns.

Fighting poverty and remaining rich: Ceniarth shifts portfolio to impact-first capital preservation

RS Group, the Hong-Kong-based family office of Annie Chen, has moved 100% of its assets to impact and sustainable investments. “We are trying to demonstrate a particular way of managing our entire capital base,” Chen told ImpactAlpha in a 2017 interview. “In light of where the world is, with climate change and other issues, we feel that other asset owners and other wealth owners should do the same thing.”

Flexible capital

Many families designate a portion of their assets to mission or impact, via a foundation or donor-advised fund. Pritzker Simmons and Simmons wanted to direct substantially all of their assets to impact, across the portfolio and across the returns continuum. In the largest portion of the half-billion dollar portfolio, Blue Haven targets market-rate returns, in both public and private markets. Blue Haven also makes both philanthropic grants and sub-market-rate catalytic investments in ventures and initiatives that carry higher risk or offer lower returns for the market-rate portfolio.

The trick, Pritzker Simmons says, is knowing the right benchmark to use for evaluating the opportunity cost of a given investment. “This ‘beyond trade-offs’ framing is really about acknowledging that there are some investments that do not have an appropriate benchmark to even call them ‘concessionary’ or ‘market rate,’” she says.

“Market-rate” itself is a relative concept. In the fourth quarter of 2018, for example, when markets tanked, Blue Haven’s public equities portfolio suffered less damage than its benchmark. “The managers that we want to work with have a different way to think about risk than traditional managers,” she says. “And a different way to think about opportunities and returns.”

The majority of  Blue Haven’s portfolio is managed externally by Goldman Sachs Asset Management. These are investments in public equities, municipal bonds, real assets and private equity where so-called ESG, or environmental, social and governance factors, creates opportunities for outperformance or risk mitigation. These investments are “issue agnostic,” allowing Blue Haven to be opportunistic in finding successful pro-social and pro-environmental strategies across sectors and geographies.  

That exploration led Blue Haven to understanding the outsized impact, as well as potential for attractive returns, in energy access, financial inclusion and logistics, primarily in sub-Saharan Africa. To pursue direct investments, Blue Haven created a $50 million venture capital mandate that also targets market-rate investments, but, like venture capital more broadly, has a higher appetite for risk.

Blue Haven began investing market-rate seeking equity in firms like M-KOPA, which has found major success distributing lease-to-own solar kits in East Africa. Targeting market-rate returns is part of the investment’s impact equation, because sustainability, growth and scale is what drives impact.

When Blue Haven looked at mini-grids, however, a newer energy access intervention, the family office determined the sector’s risk level did not fit within the market-rate portfolio. The opportunity fit better in the philanthropic portfolio. Blue Haven made a grant to PowerGen in Tanzania to prove out a lower cost model at scale. The purpose of the grant, says Pritzker Simmons, is to unlock other capital to help the firm grow, and become more investable over time.

Family offices, she says, have the flexibility to say ‘Well, ok, it doesn’t fit in that bucket, so why don’t we think about it over in our grant portfolio? Why don’t we think about supporting this with a different kind of capital, with a different risk-return profile associated with it?'”

The question of which benchmarks are most relevant was highlighted in Blue Haven’s investment in a Massachusetts pay-for-success project that used proceeds from the bond sale to fund a nonprofit up front to provide workforce readiness training to new immigrants. The investment’s return is expected to be between 1% and 2%. That would be low for a fixed-income investment. 

But it would be attractive when the comparable is a grant to the nonprofit to deliver the same services, which would result in a lose of 100% of the capital.

“Is a one to two percent return concessionary?” asks Pritzer Simmons. “I don’t know, it depends on what you’re comparing it to.”

Even ‘concessionary’ or catalytic returns have an important role in the portfolio, she says, “as long as they are in a delineated part of our portfolio, and we all know why they’re there and what they’re designed to do.”

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Lok Capital: Blending commercial capital and smart subsidies for transformative impact (podcast)

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Elevar Equity: Growing demand, growing companies and growing opportunities for impact at scale (podcast)